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Government sets out plans to give oil and gas companies more certainty over decommissioning tax reliefs


The Government has set out proposals which it says will give oil and gas companies "more certainty" over the level of tax relief they will receive on the costs of decommissioning facilities in the North Sea.

It is consulting (42-page / 273KB PDF) on the creation of Decommissioning Relief Deeds, which will contractually set out the levels of relief that companies will be entitled to claim once a facility is decommissioned. Companies will also be able to claim back at least half their decommissioning costs in the form of tax relief if they become liable for the decommissioning costs of another company which has defaulted.

The Government said that oil and gas companies are often discouraged from committing to long-term investment due to uncertainty over future reliefs, which also makes it more difficult for facilities to change hands.

The new contracts are part of a package of measures set out in this year's Budget and aimed at increasing investment in oil and gas production. The Chancellor also announced tax incentives including a 'new field allowance' worth £3 billion specifically targeted at deepwater drilling west of Shetland.

Tax relief is currently given on decommissioning costs at the point that they are incurred and the decommissioning is carried out, at a rate of at least 50% depending on the type of field and the taxes paid. Although the level of relief is currently specified in the tax code, the Government hopes its new binding contracts will allow companies to free up assets otherwise set aside to cover the costs of decommissioning, as well as prevent companies from decommissioning assets early if they fear reliefs could be "reduced or withdrawn in the future", according to the document.
Companies that have gained a benefit from a field may remain liable to pay for the decommissioning in the event that the owner at the time of decommissioning defaults on its obligations, resulting in previous owners often demanding security from new owners to cover the cost of this liability. The Government said that the new contracts would allow companies to "at least halve" these security requirements, releasing "billions of pounds of capital" for additional investment.

"By providing certainty on decommissioning costs through signing legally-binding deeds with industry, we are paving the way for billions of pounds of new investment in the North Sea," Chloe Smith, economic secretary to the Treasury, said. "This is great news for jobs not just in the North Sea, but across the UK. These changes will also benefit the taxpayer, with increased tax revenues in the long term boosting the public finances."

The Government will also "continue to positively engage" with the oil and gas industry with regards to the tax regime, she added.

Industry body Oil and Gas UK said that an "effective solution" on how best to provide certainty around decommissioning tax reliefs could result in billions of pounds worth of extra investment in the UK continental shelf.

"An effective solution should provide the industry with the long term confidence to invest in oil and gas activities for a long time to come and delay decommissioning of oil and gas infrastructure, give rise over time to up to £40bn of extra investment and result in the recovery of an additional 1.7bn barrels of oil and gas," said Mike Tholen, its economics director. "The Exchequer could receive an extra billion pounds of tax revenues in the first five years alone."

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